Making an offer is easy. Crafting an offer that tempts rather than offends your opponent requires preparation.
In negotiation, an offer that offends is sometimes described as falling within the ‘insult zone’. The purpose of negotiation is to obtain a benefit, and each party to a mediation will have interests that they hope to protect. The recipient of an insulting offer is likely to conclude that its interests are better served by following its Best Alternative to a Negotiated Agreement (BATNA). In most cases that means walking away and continuing with an expensive and time-consuming litigation.
Even if the recipient of an insulting offer does not abandon the mediation, their counter-offer is likely to fall within your insult zone. This is not a good way to build trust in a negotiation. More importantly, it is not likely to produce a mutually beneficial settlement.
So how do you ensure that offers made during a mediation do not fall within the insult zone? Determining the Zone of Potential Agreement (ZOPA) can help you to ensure that any offer you make furthers your interests and avoids insulting your opponent.
What is the ZOPA?
We can define the ZOPA by using a simple example. In this example, the claimant is hoping to recover £500,000 from a defendant for breach of contract.
- The claimant’s lawyers advise that the claim is likely to succeed at court and have calculated the claimant’s BATNA to be £350,000.
- The claimant will not want to accept less than its £350,000 BATNA (sometimes referred to as the ‘walk-away’ figure).
- Ideally, the claimant would like to agree a settlement of £450,000 at mediation.
(For this article we will use BATNA as a term for each party’s walk-away point because it is the more common term. However, calculating the MLATNA (Most Likely Alternative to a Negotiated Settlement) is preferable as it provides the most ‘likely’ alternative if the claimant walks away from the mediation without a settlement. The method for calculating the BATNA and MLATNA is covered in an earlier article.)
- The defendant’s lawyers believe that their client has a good chance of defeating or reducing some elements of the claimant’s claim and have estimated their client’s BATNA at £380,000. The defendant would, therefore, not consider paying more than £380,000.
- Ideally, the defendant would like to pay no more than £250,000.
The following diagram shows these positions.
The diagram shows that there is an overlap of £30,000 between the least that the claimant will accept and the most that the defendant will pay. This overlap defines the Zone Of Potential Agreement: namely, the ZOPA.
How to use the ZOPA
In the same way that the BATNA is an estimate of each party’s walk-away point, the ZOPA is a useful estimate of the relative position between the parties’ ranges (the range between their ideal payment and their BATNA).
Any offer that is within the ZOPA would provide the claimant with a reasonable settlement and would have the greatest prospect of being accepted by the defendant.
The claimant in this example, however, might wish to improve on the highest amount possible within the ZOPA range(£380,000). It is also likely that if the claimant makes the first offer at £380,000, the defendant will wish to improve their position and make a counter-offer for less than that amount. In these instances, some negotiators make their first offer within an area outside of the ZOPA called the ‘credible zone’, shown in the diagram below.
An offer within the credible zone is outside of the ZOPA but may still be regarded as tolerable by a recipient.
The tolerance of a party to an offer outside of the ZOPA varies. As such, the placement of the credible zone will vary from dispute to dispute and from party to party in the same dispute. A skilled negotiator will judge how far away from the ZOPA they can pitch an initial offer to keep their opponent at the table while maximising their chance of a good settlement.
It is important to remember that the further an offer strays from the ZOPA, the greater the likelihood of causing offence.
What if there is no ZOPA?
Not every negotiation has a ZOPA. For a Zone Of Potential Agreement to exist, there must be an area of overlap between the acceptable ranges for the parties. We can amend the earlier example to clarify this point.
- The advice from the claimant’s lawyers remains the same as before: the claimant’s BATNA, or walk-away point, is £350,000.
- The defendant’s lawyers are more confident than before in their ability to defeat or reduce the claim. Their BATNA, or walk-away point, is now £320,000 (the most they will pay has been reduced by £60,000). The defendant will not want to pay more than this amount to settle at mediation.
- The defendant’s ideal settlement has also now been reduced to £200,000.
The diagram below illustrates both parties’ positions.
In the example above, there is a gap of £30,000 between the least the claimant will accept and the most that the defendant will pay. With no overlap, there is no Zone Of Potential Agreement.
The initial absence of a ZOPA does not defeat the possibility of a settlement. Both parties can work together to bridge any gap in the following ways:
Review the BATNA
The greater the difference between the parties’ walk-away points, the larger the gap that has to be bridged.
A review of your BATNA and that of your opponent, using information exchanged during the mediation, may alter the walk-away points and reveal a new ZOPA.
Money isn’t everything
For simplicity’s sake, the example above assumes that the interests of the parties are limited to money. This approach lends itself to thinking about a negotiation as a zero-sum game (also known as distributive negotiation) where there is a ‘fixed pie’. In a distributive negotiation, any gain by one party would be at the expense of the other.
In practice, many negotiations are potentially win-win games (also known as integrative negotiations). These disputes involve monetary and non-monetary elements. In an integrative negotiation, not all of the gains by one side are at the expense of their opponent. The parties work collaboratively to find value in other areas as a way of ‘expanding the pie’.
Non-monetary interests can often bridge the gap between opposing BATNAs by introducing benefits outside of any disagreement about money. New business opportunities, the end of an expensive and time-consuming litigation, or even a simple apology are examples of non-monetary benefits.
Knowing your ZOPA is an important part of preparing for a mediation. But you should consider regularly re-evaluating your ZOPA, together with your BATNA and that of your opponent. This will give you the best chance of making an offer that the other side cannot refuse!